Posted by: Josh Lehner | March 28, 2023

Upcoming 2022 County Population Estimates from Census

On Thursday (March 30th) Census will release nationwide population estimates at the county level. We already have Portland State’s county estimates for Oregon, and state estimates from Census. We know the Census data shows net out-migration from Oregon, and we know the PSU estimates show Multnomah is the biggest source of weakness.

I am out of town on Spring Break, so will be unable to respond as the data is released. I will dig into them when I return next week. But, there are a few specific things I am watching for in the data and I thought I would share them in advance of the actual data. Keep in mind one of the biggest benefits of the Census estimates are they are nationwide, so one can compare relative patterns across the nation to get a gauge on what is happening.

First, counties are an imperfect geographic unit to analyze. Counties actually work pretty well in Oregon, especially in the Portland region where the primary (largest) city is mostly contained in a single county, and the other counties are the suburbs. That is far from the case elsewhere in the nation. Large metro areas like Phoenix and San Diego are entirely contained within a single county, and the Los Angeles MSA is just two counties. These differences complicate any analysis trying to get at what happened during the pandemic, and possibly post-pandemic as well, time will tell.

Second, what happened during the pandemic, at least in the 2021 data, is a clear urban-suburban-rural pattern. Across nearly all large metro areas where county level data provides useful information, the urban core county lost population. This wasn’t just in Portland and Seattle, but also in some Sun Belt metros like Dallas, Nashville, and Orlando. Does this relative pattern continue in the 2022 population estimates? Do some of these cities see a rebound? If so, which ones saw relative improvements and which ones saw further losses? That’s a key item to watch.

Third, beyond the urban core story, are there broader patterns in the suburbs or rural areas that are of note? Are some entire metro areas seeing slow/no growth or are the suburbs holding up well even if urban cores are weak? Do we see growth holding steady or even accelerating into rural counties, or some sort of slowing? What about Deschutes County, which has still been growing faster than the state, but growing relatively slower than its historical rate? Does Census also estimate that places like Klamath and Malheur are seeing comparatively stronger gains? Lots of items to check in on with the new data.

Fourth, how does Clark County specifically impact the Oregon and Washington numbers? We know Census estimates the State of Washington also experience net out-migration and we have a good idea that Clark County saw net in-migration, so how does that impact the Portland regional numbers, and then what about Washington ex Clark in terms of migration, especially from the Puget Sound region?

Fifth, there are no silver linings when more people are voting with their feet saying they don’t want to live in your community. Even so, in terms of the economic impacts moving forward, the composition of the changes does matter. It’s not good to lose young families and retirees, but losing working-age households as well is even more problematic in terms of the economy. Now, we will not get the socio-economic characteristics of migrants until this fall when Census releases the 2022 American Community Survey data. But if we take a look at the available data, we see that even in 2021 there was net in-migration to Multnomah County among 20- and 30-somethings. That means young adults were still moving in during the pandemic, and will be starting to set down roots and the like. What does this look like in 2022 and beyond? That will be a key item to watch when the data becomes available.

Looking forward our office’s statewide forecast does call for a modest rebound in population growth and migration in 2023 and 2024. The regional economy is strong and job opportunities are plentiful. It is a very modest rebound, with statwide population gains being less than 1 percent annually for the decade ahead. We know the upcoming 2022 data will be down, we just don’t know exactly what Census estimates the geographic patterns or socio-economic characteristics are yet, that’s what new information we will receive this week and this fall respectively. As we learn more, we can continue to update our thinking on the impacts, the implications, and the forecast. Happy Spring Break everyone.

Posted by: Josh Lehner | March 21, 2023

Oregon’s Regional Income Distributions

The impact of the pandemic and economic recovery to date on regional economies within Oregon is the exact opposite of the fallout from the Great Recession and expansion last decade. Back then it was the nation’s largest metro areas, with their more diversified economies that lead growth. The Portland region in particular was a standout, being among the fastest growing large metros when it came to high-wage job growth, median household income gains, and increases in educational attainment. The state, and nation’s smaller metro areas and rural economies tended to lag the recovery until mid-decade when they began to regain lost ground.

Today, it is those smaller metro areas and rural economies that are leading growth. Large metro areas nationwide are lagging. The impact of working from home and loss of business travel during the pandemic is disproportionately impacting big cities, and their urban cores. Population has followed as workers are now able to live farther afield.

Even as the recent relative patterns of growth point toward the urban-rural divide not widening during the pandemic, there have been clear, longer-running trends that point toward these differences when it comes to demographics, educational attainment, incomes, industrial structure, and poverty, among others.

In recent decades, income growth in Oregon’s urban areas has outpaced gains in rural areas considerably. Back in 1980, the typical rural household in Oregon’s income was about 10 percent lower than the typical urban household in the state. Today, that difference is 25 percent.

There are myriad factors impacting economic growth, including both the number of local workers and how productive each worker is. The use of capital – be it financial, human, natural, physical, or social – is a key consideration when identifying a region’s strengths and future opportunities.

What follows is a large slide deck that shows historical trends at the regional level across Oregon when it comes to income and poverty. There are also snapshots at the regional level of how many local Oregonian households are struggling with high housing costs, including measures of poverty, residual income, and using MIT’s Living Wage calculations. These regions are grouped at the county level, and based on available microdata from the Census Bureau so we are talking about Public Use Microdata Areas (PUMAs). The map below shows the regions used in the slide deck. I do break out East Cascades as well, into Deschutes, and the North Central region (which is the Gorge down through the rest of Central Oregon ex Deschutes).

Lastly, I’m not sure there is a big takeaway here other than some of these longer-run trends across the state. Those trends have been a bit different in recent years as noted and depending on the urban-suburban-rural dynamics in the years ahead, may continue. But these slides I hope are a useful reference for those interested in this type of information. This is actually a project I had ready to go in February 2020 and then shelved due to the pandemic as our needs and focus shifted toward the recession and recovery.

Posted by: Josh Lehner | March 16, 2023

Macro Update: Inflation and Wages

Two housekeeping notes and a quick update on the current macroeconomic setting.

First, next week I will finally be getting out the historical look at regional income and poverty trends, along with regional housing burden estimates looking at residual income and the like.

Second, Census will release their 2022 population estimates for all counties nationwide on March 31st. This will be important data to track as it will allow us to get a better look at the urban-suburban-rural dynamics and how Oregon does or does not fit into patterns seen elsewhere. Unfortunately, or rather fortunately I will be out of town during Spring Break and unable to respond to the data immediately. In advance of the data, I will post more details on what our office is looking forward to seeing in the data and then follow up when I am back in the office.

Third, the Federal Reserve meets next week. Expectations were for another 0.5% (50 bps) increase in interest rates given the continued hot inflation and strong economy. Now, the bank run and collapse of Silicon Valley Bank complicates monetary policy and financial stability is paramount. Whether or not the Fed pauses (no hike next week) or chooses to go with a smaller 0.25% (25 bps) increase is to be determined. Expectations are for a hawkish pause, if you will given the economic data.

The chart below shows our office’s inflation forecast. In our document we noted that the recent inflation data to end 2022 had slowed, but also remained too high relative to the Fed’s target. The slowdown was due to more one-off factors like a decline in energy prices and a moderating of goods prices. The underlying trend remains well above something consistent with the Fed’s target. As a result we had inflation reviving in the first half of the year and staying in the 3-4 percent range for some time. Well, so far in 2023 both the January and February inflation data show this general pattern of reviving inflation, but it has happened much sooner, and much stronger than forecast. Inflation is currently running at more like a 6 percent pace. This is the main reason why expectations were for the Fed to raise rates noticeably higher in the coming months.

While economists have talked a lot about supply chains and oil shocks and their impact on inflation, rightfully so in recent years, the important underlying driver of persistent inflation is income and spending growth. The tight labor market and faster wage gains are likely to keep upward pressure on inflation in the months and quarters ahead. Here is a quick check in on one measure we follow in our office. It looks at actual employment compared to our demographically adjusted measure of the potential labor force. Unlike the unemployment rate, where the specific numbers matter, this is used as a high-level gauge of the relative strength in the labor market. Today, using the latest data that was also just benchmarked, shows Oregon’s labor market is nearly all the way back to where it was on the eve of the pandemic, and nearly higher than any other point in the past 30 years. Yes Virginia, the labor market is tight.

Ultimately we know labor income growth will slow if for no other reason than job growth will slow due to the fact there are few people available for work who do not already have a job. To date we have seen labor income slow from double-digit growth rates during the reopening period to around 7 percent today (national figures are similar). And as job growth slows in a tight labor market, total income will as well, and back to something more consistent with historical periods and hopefully more consistent with 2 percent inflation.

Note that in this forecast this still occurs even if per worker wage growth remains stronger, because job gains will taper to sub-1%. It is important to keep in mind Oregon’s potential labor force is also increasing at sub-1% rates due to the slowdown in population growth and the underlying demographics and increased retirements as the Baby Boomers age into their 60s and 70s.

Now, recent wage gains per worker are showing mixed signals. Average wages as defined as total wages divided by employment have slowed, and Oregon withholding revenues have slowed even more. On the other hand, Oregon’s average hourly earnings measure hasn’t slowed at all really and continues to boom. Even so, the closely watched measure of the national Employment Cost Index fits somewhere in the middle where the increases have slowed a little bit, they are off their peak, but still faster last quarter than anything experienced last decade.

Bottom Line: The Fed is in a tough spot. Not just due to the possible banking concerns, but due to the still hot inflation data. As opposed to the hard or soft landing, to date the economy has shown more of a no landing pattern. Nominal growth continues to be quite strong. From that perspective the Fed clearly has more work to do. We shall see how they try to balance the near-term risks with the longer-term policy goals of maximum employment and price stability.

Posted by: Josh Lehner | March 9, 2023

Oregon’s Fertility Rate (Graph of the Week)

Yesterday our office was back in front of the House Committee on Revenue covering two topics (you can watch here if you would like). First, while the prime directive of our office is the General and Lottery Fund revenue forecasts, our office also compiles the Other Funds Revenue Report twice a year. Michael dove into the highlights there of these other major revenue streams for the state. Our office does forecast a few of these Other Fund revenues that do not go into the General Fund, such as the Corporate Activity Tax, marijuana, tobacco, etc but most of these forecasts are done in-house for the various agencies.

Second, Kanhaiya, the state demographer, gave an overview of the population and demographic forecast. At a base level, it’s that population forecast that forms the foundation of every other forecast we do. It really drives underlying views on the amount of potential workers, demand for housing, how much income, and what types of income is being earned and the like. And with the slowdown in population growth during the pandemic, to the extent migration and population growth rebounds modestly as our forecast expects, or not matters considerably when we take a 10 year forecast view.

All of that said, there was one chart, or rather one slide of Kanhaiya’s that really stood out to me. It looks at Oregon’s fertility rate in recent decades, both at the overall level and on an age-specific basis. I’m pulling it out and making it the latest edition of the Graph of the Week.

We’ve talked a lot in recent years about how deaths in Oregon now outnumber births and will continue to do so for decades to come. Pre-pandemic we even did a three part series on these trends. And while the unfortunate increase in deaths during the pandemic is the immediate cause of these demographic shifts, it’s really Oregon’s low birth rate that is driving the long-run trend. In the chart below you can see how Oregon’s fertility rate has both declined, particularly among younger Oregonians, and also shifted outward a bit, where birthrates are now higher among 30- and 40-somethings than a few decades ago.

These trends are nationwide, and even global in nature. Kanhaiya mentioned that in recent years every single state now has a fertility rate below the replacement rate. So it’s more a matter of degree where Oregon’s declines are more pronounced. In the years leading up to the pandemic, Oregon’s total fertility rate was the fifth lowest among all states, and in 2020 it was tied for the second lowest.

Some of the implications here vary. At the individual and household level, these long-running trends are not necessarily worrisome. As a society we should hope to see women making the choices they want to make in their lives! And we know historically as societies get richer and increase educational attainment, the birth rate tends to decline. It’s more of a problem if women and families want to have more children and do not because they do not feel like they can due to finances, or housing, or health insurance, or child care, or whatever other challenges there are.

Even so, it’s more at the macro level where the implications of low fertility rates really come into play. Already we are seeing the demographic impacts in the labor force where we know retirements have increased as the Baby Boomers are now mostly in their 60s and increasingly their 70s, and the younger generations are smaller in places like Oregon where we have been below the replacement rate for decades. For businesses it will be hard to find workers for the foreseeable future given the labor market is structurally tight for demographic reasons. Additionally, we are also seeing K-12 school enrollment declines, which given births have taken another step down even in the preliminary 2022 data, will certainly continue for years and possibly decades to come. Now, these are not necessarily problems per se, but rather certainly will require a rethink on how we approach growth, our expectations for the future, and the need to adjust public policies and the like.

Posted by: Josh Lehner | March 1, 2023

Oregon Kicker: What’s Your Cut?

This post updated 3/2/23. We adjusted the assumptions needed to estimate the kicker across the distribution. In the big picture the changes were minimal. For example the median increased by $5. As we learn more about the actual 2022 income distribution this tax season, we will continue to update these estimates.

Our most recent economic and revenue forecast released last week now projects that Oregon’s unique kicker law will kick by a record amount at the end of the current 2021-23 biennium. For the personal kicker — remember this is actually all non-corporate revenues in the General Fund — the forecast now expects the kicker to be $3.9 billion. The exact kicker amount will be finalized and certified this fall. The kicker will be paid out as a credit on Oregonian tax returns during the spring 2024 tax filing season a year from now. What follows is a rough estimate of what you may receive based on your income.

Keep in mind that Oregon pays the kicker out the same way we take the revenue in, based on one’s tax liability. Every taxpayer receives the same credit percentage on their taxes, but that does mean in dollar amounts, the more you earn, the larger your kicker. Taking Oregon’s current income distribution, and the current projected kicker yields the following estimates. The typical Oregon taxpayer will receive a $790 credit on their tax returns a year from now, while those higher up the distribution will receive 4 and 5 figure kickers. The average Oregon taxpayer in the Top 1% will receive a kicker of $42,000.

In terms of the economic impacts of the kicker, they differ depending upon what exactly we are measuring. At the macro level the impacts will be noticeable, but a bit muted for a few reasons. First, a $3.9 billion increase in disposable personal income in 2024 is a boost of about 1.3 percent based on our economic forecast. In terms of consumer spending, or increased revenues for local businesses, the impact will be less than that.

For one, when we, as humans, receive a one-time unanticipated income bonus we spend some of it, and save some of it. For another, each of us have different marginal propensities to consume (MPC) which gets at how much of that one-time income increase we spend quickly. There are a handful of academic papers our office has used over the years that help us estimate was the consumer spending impact of the kicker could be. Those tended to range in the 15-20 percent range, although one paper was more like 40 percent once you take into account household liquidity constraints. Part of that is the distributional effect, where lower-income households live paycheck to paycheck and will spend the largest percentage of their kickers, while higher-income households will save a larger amount. With the vast majority of the kicker dollars paid out to high-income households (because they have the vast majority of income and tax liability) the net effect of the spending increase is a smaller fraction of the total paid out.

That said, there are a few newer research papers that show somewhat higher MPCs and therefore would mean larger short-term impacts. Specifically, a new study from the Federal Reserve finds a splurge factor of 31%, although much of that work is tied to analyzing fiscal policy during recessions, like stimulus checks, extended UI benefits, and payroll tax cuts. That said, the MPC out of lottery winnings in Norway is 52%, meaning a little more than half of lottery winnings are spent within a year, and 90% are spent within 5 years. The paper finds MPCs are highest for smaller dollar amounts, households with less liquid assets, and younger households.

To help frame these potential impacts, if we take the 31% splurge factor, that would be an increase of $1.2 billion in consumer spending in 2024. As a share of household spending, that’s about equal to what we spend on appliances, or sporting goods. If we take the 52% lottery winnings factor, that would be an increase of $2.0 billion in consumer spending in 2024. As a share of household spending, that’s about equal to what we spend on air travel, car insurance, or internet access. Research shows we tend to spend one-time money on one-time things like durable goods or leisure activities. One example out of the Norway research is lottery winners were only slightly more likely to buy a car but those who did buy a car, bought a more expensive one.

Finally, the other major impact of the kicker is on the state budget. I do not want to put words in the mouths of policymakers and budget folks, but the impact here is real as well. The kicker is based on our office’s forecasts made a bit more than 2 years in advance. When our office’s forecast is off by more than 2%, all of the revenue above the forecast, including the 2%, are credited back to taxpayers. This reduces available resources for policymakers. As a result, Oregon is unable to provide as many public services as our tax system is designed to provide, even as the kicker is of course part of the tax system itself. The kicker does not mean Oregonians overpaid their taxes, it means our office underestimated revenues. There are a few potential impacts here, ranging from the distributional impacts of public spending on various programs and projects, to the ability to increase savings when revenues come in above expectations, and the like. While the kicker reduces available resources compared to actual revenues, it does not necessarily reduce revenues in future budget periods so long as the economy continues to grow, and the revenues coming in today above forecast remain unspent, knowing they will paid out in the near future. The biggest budgetary challenges come when there is a kicker right as an expansion ends and a recession begins. Revenues slow and needs increase during tough times. This has been Oregon’s recent experience following both the technology and housing booms in recent decades.

All of the estimates above are based on our most recent forecast. Final kicker figures will be certified this fall.

Posted by: Josh Lehner | February 22, 2023

Oregon Economic and Revenue Forecast, March 2023

This morning the Oregon Office of Economic Analysis released the latest quarterly economic and revenue forecast. For the full document, slides and forecast data please see our main website. Below is the forecast’s Executive Summary and a copy of our presentation slides.

Either the economic storm clouds have parted, or we are in the eye of the hurricane. Any near-term recession fears are fading with each month of somewhat lower inflation and the continued economic boom. However, the Federal Reserve must still navigate the choppy waters of a tight labor market, fast wage growth, easing financial conditions, and strong household finances and consumer spending. All of these are likely to keep the underlying trend in inflation above the Fed’s target for the foreseeable future.

Last quarter our office made a late 2023 mild recession the most likely outcome for the Oregon economy, primarily due to the fact there had been zero slowdown in inflation at that time. Today, there have been a few months of somewhat lower inflation. Even as the underlying trend in inflation remains twice as fast as the Federal Reserve’s target, this is a noticeable slowing from much of last year. The Fed is also starting to ease off the brakes and wait for the impact of past interest rate increases to cool the economy in the months ahead.

What this means for the forecast is that the potential recession dynamics, while still very real, are likely pushed further out. The current baseline forecast no longer calls for a recession this year, but for the economic soft landing and continued expansion. While every month of slower inflation increases the probability of a true soft landing, it is likely that the Fed has more work to do. Additional interest rates increases, and holding them higher for longer are likely need to cool demand and inflation. However, the clear near-term strength in the economy in terms of jobs, income and spending, along with the uncertainty of the exact timing of any potential recession makes forecasting one so far in advance challenging, if not impossible. As Oregon heads into the upcoming 2023-25 biennium, the inflationary economic boom continues.

Personal and corporate tax collections continue to outstrip expectations. When combined with an improved economic outlook, policymakers are expected to have additional General Fund revenues during the current legislative session as they craft the 2023-25 budget.

Although the recent news has been good, there remains a significant amount of uncertainty as the biennium winds down. The 2023 tax filing season has yet to truly begin. Much more will be known when the May 2023 forecast is produced, which will determine the Close of Session forecast and be used to set the thresholds for the balanced budget and any potential kicker calculations.

Along with uncertainty surrounding the tax season, there is also the heightened risk of recession next biennium. Given the currently elevated levels of taxable business and investment forms of income, an economic downturn would result in large losses of General Fund revenues. While Oregon’s General Fund is volatile over the business cycle, the state’s overall revenue system has become less so in recent years. The increases in consumption-based taxes should help reduce overall volatility in Oregon’s tax system as consumer spending is more stable during downturns than is taxable income.

The unexpected revenue growth in the current biennium has left Oregon with unprecedented balances, followed by a record kicker in 2023-25. The projected personal kicker is $3.9 billion, which will be credited to taxpayers when they file their returns in 2024. The projected corporate kicker is $1.5 billion, which will be retained in the General Fund for K-12 educational spending. Once the 2023-25 biennium is behind us, Oregon’s major revenue sources are expected to bounce back quickly. However, growth over the extended horizon will continue to be constrained by demographics, with the baby-boom population cohort earning and spending less.

See our full website for all the forecast details. Our presentation slides for the forecast release to the Legislature are below.

Posted by: Josh Lehner | February 10, 2023

Fun Friday: Household Composition in Oregon

One benefit of downloading a lot of household data to create different measures of housing cost burdens, like residual income and MIT’S Living Wage, is, well, you have a lot of Census data at your fingertips. Let’s have some fun ahead of the weekend and Super Bowl.

First, let’s revisit middle school. No, not like that. In a fun, math way. Remember mean, median, and mode? The mean, is the average. The median is the midpoint where half of all observations are smaller and half are larger. The mode is the most common observation. See? It is fun. These measures do matter.

Next, let’s talk about Oregon’s population. In 2021, Oregon’s median age was 40.1 years old according to Census. Half us were younger than that and half of us were older than that. The median age nationwide was 38.8. By this measure, Oregon ranks as the 14th oldest state. Based on our office’s estimates, the mode — the single most common age — in 2021 was 30 years old. That means today the most common age in Oregon is 32 years old, as the bulk of the large Millennial cohort enters into their prime-working and first-time homebuying years.

Finally, let’s talk about Oregon households. In 2021, Oregon had 1.7 million households. The average household had 2.44 people, ranking the 15th smallest among all states and lower than the 2.54 national average. That relative difference may not seem like much but it is roughly equivalent to 70,000 households locally. That is 3-4 years of new construction activity. And given the household formation boom during the pandemic when people dropped roommates, 2021 household size is smaller than the 2.5 average size in Oregon and 2.6 average size nationally pre-pandemic. Even so, today’s average household size is what it was back in 2010 or so.

The mode household Oregon, or the most common type is a 2 adult household with no young children living at home. A bit more than 1 in 3 households in the state fit that description. Remember for the mode it’s not that it describes the majority of us, but rather the most common. And if we dig into the composition of 2 adult households, 66 percent are married couples, another 15 percent are unmarried partners, 11 percent are other relatives like siblings, or adult children, while the remaining 7 percent are two unrelated roommates.

If we line up all Oregon households from smallest to largest, and youngest to oldest, the median household in Oregon is a 70 year old married couple without children at home. And if we add an urban-rural dimension to the typical household in Oregon, this 70 year old married couple lives in Springfield.

A few other observations.

The dated stereotype of the 2 parent, 2 child household is just 7 percent of all households today in the state. Now, part of this is the simple life cycle trajectory. Even if a household at one point is a 2 parent, 2 child household, that time, given life expectancies and kids moving out as they get older etc, is likely just about 20-25 percent of their lifetime, which can be bittersweet when you think about it like that. And so taking a snapshot of all households today is great, but it does miss how our lives evolve over time.

Lastly, it is clear that households with no young children (18 or younger) are more common than those with kids at home. Part of that is the age structure, part is the lower birth rate and the like. But you can see that single-person households are the second most common type of household, and we know that single-person households are a growing share of our society.

Have a good weekend everybody.

Posted by: Josh Lehner | February 3, 2023

Workforce Trends in Oregon

Yesterday afternoon Mark testified in front of the House Committee on Economic Development and Small Business (video here). He really touched on a lot of the greatest hits when it comes to the current state of the labor market and how we are thinking about the outlook. A copy of his slides are below for you to browse if you would like. But first, a brief recap:

Overall, it’s encouraging that the labor market has recovered from the pandemic. The workers have fully returned, and issues like distance learning, lack of childcare, fear of the virus, the impact of federal aid and enhanced unemployment insurance benefits and the like are in the rearview mirror. There are relatively fewer working-age Oregonians not looking for work today than there was pre-pandemic. There is not some reserve army of folks sitting on the couch playing video games. And yet a labor shortage still remains because firms are looking to chase market opportunities given consumer demand is so strong. The shortage is from very high labor demand, not a lack of supply based on the Oregon data.

Compounding the cyclically tight labor market is the structural demographic story of increased retirements. New, young workers outnumber retirements, so Oregon’s labor force is and is expected to grow but will do so at a slower pace than in past decades due to our now decades-long low birth rate, and slower migration. These demographic trends impact every single industry. An interesting question arose during the discussion yesterday about which industries young workers are going into in greater numbers, so we are adding that to the research agenda. One tidbit there is we know young Oregonians have returned to the trades in the past decade, but to what degree we see other trends in other sectors, we will take a closer look.

To increase the number of available workers for local businesses to hire and expand there are really two options. One is to see continued net in-migration to the state. As of 2021, Oregon still saw more young adults across all levels of educational attainment move into the state than move out. We do not have any details on the 2022 numbers, which will be out this fall. The other way to increase the workforce is through higher participation rates among people already living in Oregon. This is where our previous look at the Latent Labor Force comes in. If we were to address any or all of these historical disparities — differences across sex, race and ethnicity, and educational attainment — it would increase the size of the local workforce by much more than stronger migration every could.

Lastly, economic growth isn’t just about the number of workers, but also about productivity. There are many different forms of capital that can be used to increase worker productivity, be it natural, financial, physical, human, or social in nature. Each regional economy within the state has strengths (and weaknesses) in these different forms of capital which can propel (or hinder) growth in the years ahead.

Posted by: Josh Lehner | January 26, 2023

New Housing Under Construction

Yesterday we talked about the number of Oregonians struggling with housing costs. There are two parts to housing affordability: the actual cost of housing (rent or mortgage payment) and household income. You can achieve better affordability via either, but ideally both ways. We would like to see incomes rising faster than housing costs, and also for housing costs to increase at a slower rate in general. It’s this last bit where there is better news on the horizon for renters nationwide and here in Oregon.

We know that the combination of strong underlying demographics, rising incomes, and the desire to drop roommates during a pandemic led to a household formation boom in recent years. This drove vacancy rates and for sale inventory down and prices up. Builders and developers responded to the tight housing market by trying to increase construction.

First, single family permits rose considerably, but have now fallen off as higher interest rates sapped the market in 2022. Here in Oregon single family starts are down 22% percent from spring 2021 to the end of 2022 (using quarterly data not individual month peak to trough). But notice how they’re kind of just back to pre-pandemic levels and not plunging further, or at least not yet. Our last forecast assumed another step down in single family starts in early 2023, but that was before interest rates dropped closer to 6 percent. There will likely still be some weakness, but today expectations are probably more for stability rather than further declines moving forward. That’s a silver lining.

Second, multifamily initially slowed in the pandemic but once the vacancies dropped and rents rose, there has been a rebound in activity. The timing of these increases have mostly offset the declines in single family starts, leaving total new construction activity in Oregon relatively flat. It’s down, about 12 percent peak to trough on a quarterly basis, but fundamentally it’s kind of flat relative to the years leading up to the pandemic. The real question at the moment is what happens with multifamily starts this year and next.

The reason I ask is the following chart. While housing starts are one thing, it’s another to finish construction and have a habitable unit for people to live in. Right now, due to the supply chain issues during the pandemic there are a lot more housing units nationwide under construction that not yet been finished. The pipeline of supply is full. The backlog of single family is starting to correct, both as supply chains get better and the higher rates sapped new demand allowing for some catch up. But to date the backlog of multifamily activity hasn’t slowed down in any meaningful sense. The last couple of months of multifamily permits nationwide are weaker, but that doesn’t really appear to be the case in Oregon, although month-to-month is very noisy locally.

As you can see in the chart this has been a building dynamic for quite some time. I have been a little hesitant to discuss just because we don’t have good local data on how this may or may not be the same or different in Oregon. There are some third party estimates out there for some markets/submarkets and Census estimates show a growing backlog in all regions of the country.

One way I’ve been trying to think about it is to look at Oregon apartment construction relative to the U.S. Here you can see that while Oregon multifamily permits are strong, as a share of the U.S. they’re lower now than in the years leading up to the pandemic (dark blue line). So the open question is does that mean the backlog of construction is less in Oregon relative to the national or regional numbers? Is our backlog simply proportional? Or does the relative slowing in the share reflect slower population growth? Or is it more than some other locations started building apartments and our local trends are what you would expect? We don’t have answers to those questions exactly, but they are worth thinking about.

The bottom line of all of this is better affordability on the housing cost piece of it, especially for apartments. The household formation boom slowed as affordability worsened. Combining a slower market with a record backlog of units under construction means slower rent increases and/or declines. The fears of the 2023 maximum allowable rent increase being 14.6 percent due to last year’s inflation are misplaced from a marketwide view. However that doesn’t mean there won’t be neighbors who see their rents go up by the maximum, or that different segments of the market will experience different trends. It’s that from a high level, macro view of housing, costs will get better, and affordability will improve via both components as incomes are increasing as well. The challenge is these improvements are coming off such a bad starting point for affordability.

Three final thoughts. One, the question for the outlook is how much do new multifamily starts slow in 2023 and 2024 due to the softening rental market? Single family appears to be at or near a likely bottom, but multifamily hasn’t really weakened yet. Two, we have seen no construction layoffs to date, despite the sharp drop in new single family activity. Yes, the backlog has kept workers busy as new orders slow, but if that market is bottoming, and nonresidential is good, and public works will acceleration as infrastructure work gets under way, it’s getting hard to see where actual construction layoffs will occur overall. Third, the risk there is a recession but the softening rents will feed into slower inflation which better supports growth as the Fed can ease off the brakes a little bit for that reason, even if they need to keep on the brakes due to the fundamentally better growth. Lots of moving parts, and feedback loops here to ponder as we meet with our advisors in the weeks ahead. Our next forecast is due out Wednesday, February 22nd.

Posted by: Josh Lehner | January 25, 2023

Oregon Households Struggling with Housing Costs

We know Oregon housing affordability is bad and is a macroeconomic risk if working-age households cannot or choose not to live here. During the pandemic affordability worsened as we had a household formation boom resulting in very low vacancy rates and rising rents. Those dynamics are now shifting and there is a bit of encouraging news in the pipeline I will get to tomorrow. But first I wanted to highlight some new affordability work I have been doing.

There are myriad ways to measure housing affordability. Each metric has pros and cons. The most commonly used measure is if a household’s housing costs are more than 30% of income or not. It’s a quick and easy measure you can pull off published Census tables. It’s simple to understand. But it lacks any nuance. What about households where they have below market rate housing costs but still do not have enough money left over to put enough food on the table or buy winter coats? That’s where a measure like residual income comes in. It looks at how much money you have after paying for housing costs. It’s a superior measure in that it gets at what we really mean by being housing cost burdened. The challenge here is this measure is not readily available, you have to dig into the microdata and create it yourself. And there aren’t really any guides or handbooks on how much money you need to everything else besides housing. And so you can turn to something like MIT’s Living Wage calculation to figure out how much a household needs to live reasonably comfortably. There are other options here like the self-sufficiency standard, or United Way’s ALICE and the like. But for now I have used the Living Wage at least as a placeholder to get at these issues.

So what does the 2021 data show for Oregon? 21 percent of renter households in the state were living in poverty. However, 44 percent of rental households spend more than 30 percent of their income on rent each month. 54 percent of renters do not have enough income left over after paying rent to afford the basics. And 63 percent of rental households have incomes below MIT’s Living Wage calculation for Oregon based on various household sizes and compositions. There are hundreds of thousands of Oregon households who struggle with high housing costs relative to their incomes.

Oregon homeowners with a mortgage are relatively better off — because most homeowners have higher incomes, hence why they can better afford to buy versus rent — but still many struggle with high housing costs. 4 percent of homeowners have incomes below the poverty line. 20 percent of homeowners spend more than 30 percent of their income on their mortgage, and/or do not have enough income left over after paying their mortgage(s). 31 percent of homeowners in the state earn incomes below MIT’s Living Wage calculation.

One key distinction that gets lost in these numbers is the relative overlap between the different measures. For instance, there are about 48,000 Oregon households (3% of the total) that spend more than 30 percent of their income on housing but also have enough residual income left over to cover other living expenses. These households are traditionally cost-burdened but not necessarily living in hardship. This group is an indication that some measures could overstate the true number of neighbors struggling. After all if, say, a doctor chooses to spend lavishly on housing, they would still be able to pay the bills and put food on the table. That said, there are 100,000 Oregon households (6% of the total) that are in the reverse situation. These households spend less than 30 percent of their income on housing but do not have enough residual income left over to cover other living expenses. So, on net, this would indicate that the rough rule of thumb of 30 percent of income understates Oregon households who struggle with high housing costs. These different subgroups are important to note, but are relatively small pieces of the overall picture.

So what does all of this mean? The story here is not new, even if this particular chart uses new, updated data. It means we know there are hundreds of thousands of Oregon households that struggle with high housing costs relative to their incomes. There is always a great need for assistance for our neighbors, family, and friends. It means we need to see an increase in overall supply of housing production to help with broad affordability. This includes new market rate housing that meets the needs of high-income households so they are not competing with low- and middle-income households for the same units, and also more targeted investments to increase the supply of Affordable and workforce housing as that is where the current needs are greatest. I think there is some progress being made, or will be made for portions of this, which I will talk a bit more about tomorrow.

Also stay tuned. I have regional versions of the chart above. I know many cities and counties have similar type calculations from work they have done, or had consultants do. I won’t presume to know all the local details and defer to individual cities work. But I think one benefit here is at least using a consistent methodology and dataset across the state. In the next week or two I will finish up the regional income trends work and include the housing costs charts as well.

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